Advice

Small Businesses Team Up to Land Federal Contracts

Construction crews work on a freeway overpass along Highway 101, in Novato, California

Back in 2008, Randy Lebolo sensed the housing market was “going down hard,” so he started looking for ways to diversify his commercial construction business. The Colombian immigrant certified his Boynton Beach (Fla.)-based company as a small, disadvantaged business through the Small Business Administration’s 8(a) Business Development Program. The certification, which took six months and cost Lebolo about $5,000 in time and consulting fees, gives his 13-employee business an advantage: Government agencies set aside projects on which only 8(a) certified companies can bid.

The program is intended to steer some of the federal government’s spending to small businesses, particularly those owned by women, minorities, and veterans. Lebolo, a U.S. citizen born to a Texan mother and Colombian father, has found the investment fruitful. His 12-year-old company, Lebolo Construction Management, got its first federal contract in October 2009 and has won five additional contracts since, including gutting and remodeling two floors of a federal office building in Miami last year, Lebolo says. This year he anticipates revenue will be close to $11 million, up from $3 million in 2011, thanks to an $18 million joint venture with the Weitz Co., one of the state’s largest contractors.

Federal agencies are supposed to set aside 23 percent of prime contracts annually for small businesses. They regularly fall short of that goal, though the numbers are improving slightly: In 2010, 22.7 percent of prime contracts, totaling nearly $98 billion, went to small companies, up from 21.9 percent in 2009 (PDF). In the same period, 35.4 percent of subcontracts went to small companies, up from 31.8 percent in 2009 and close to the 35.9 percent goal. Numbers for 2011 are expected in July.

Small and midsize contractors can increase their share of government work by subcontracting for large prime contractors (which lead the work and are legally responsible for completing the contract) or teaming up with other small businesses to collaborate on a contract, according to a survey released this month of 740 small companies that have won contracts within the past five years.

The survey (PDF), conducted for American Express (AXP) Open Forum in 2010 and 2011, found that of those who have teamed up, more than two-thirds have exceeded $1 million in federal contracts, and more than one-third have exceeded $10 million. Those figures drop to just less than half and about one-fifth, respectively, for contractors that have not partnered with other companies.

Ron Perry, a native Alaskan who serves as chief executive officer of 57-employee Teya Technologies, a certified 8(a) small, disadvantaged business that does construction and provides other services to government agencies, estimates that he has partnered with 50 other firms on federal contracts in the past five years. While it subcontracted early on, Kenai (Alaska)-based Teya is now a $26 million business that typically acts as the prime contractor on bids and tends to use the same partners for multiple jobs. “When you get a solid team that can put a good presentation together, the next thing you know you’re on [procurement officers’] A-lists,” Perry says.

He says meeting government buyers face-to-face at industry conferences is crucial. Perry attends about a dozen a year. “If you want to capture federal contracts, they need to see you,” he says. “It’s not easy when people say no, but you have to have enough fire in your belly to wait for a yes.”

There are risks to working with other companies, especially large prime contractors: Nearly one-third of small business contractors surveyed indicated they had been shut out of contracts they were bidding on, study author Julie Weeks says. “We’ve heard over the years a lot of small business owners talk about how they put their intellectual property into preparing a proposal, but when the prime won it, they either went with somebody else or decided to do all the work themselves,” she says.

Eric Basu, CEO of San Diego-based Sentek Global, learned a tough lesson on a subcontract when the company was in its early days. “When you first start out, no one wants to do business with you, and you can get very onerous terms imposed on you,” he says. “We worked with a large defense contractor that took 33 percent off the top as a pass-through fee, although we did all the work. They just processed the invoices.” Typical pass-through fees are closer to 5 percent or 6 percent, he says.

Still, teaming and subcontracting are the “lifeblood” for such small businesses as Sentek, which does engineering and information security services primarily for the U.S. Navy, Basu says. The $17 million company relies heavily on personal relationships when it goes after new contracts: “A lot of this business is done in person or by phone on a friendly basis,” he says. “A company that doesn’t have a lot of background in something will team with one who does.”